3 Critical Elements of a Custom Software Development Contract

Custom software development projects can be daunting, especially when you’re thinking about the contract and what it should include. A comprehensive, well-thought-out contract helps ensure expectations are aligned, the project goes smoothly, and everyone wins—no unpleasant surprises.

To get there, you’ll need to have multiple conversations with your custom software development firm. The following are key considerations to ensure an effective and mutually beneficial contract.

1. Contract Terms

What are the conditions and specifications of your contract? What will your development firm create, and what will you provide? How much will you pay for it? Will there be a warranty period?

Terms should be spelled out in black and white with any custom software contract. Make it easier to determine terms by discussing expectations and deliverables in depth with your development firm.

As developers understand your needs, they’ll get a good sense of required materials: all that’s needed to complete the project. Materials can include staff, equipment, servers, and more. They should be documented and quoted in your contract.

Your terms should also cover intellectual property—namely, who owns the software code. Code ownership determines who gets to use the software after the application is coded, and how.

Legally, the developer owns the copyright the instant they write the code. If we held on to that copyright in its true sense, then no one would ever be able to use the code, we wouldn’t make any money, and there would be no point in writing it in the first place. Other development firms, however, may try to block you from taking the code elsewhere in the future. In any case, intellectual property terms must be detailed in your contract to allow the code to have value for both parties.

2. Software Timeline

When would you like the project to be complete? Your custom software development firm will work with you on a reasonable timeline, and clarify what you should expect. From there, they will build out a realistic timetable for completion, given that they’re provided everything they need to complete the job.

A few timeline considerations:

  • Do you want to measure progress by milestone or end delivery?
  • Be sure to budget time for quality assurance and control testing. Most people do not account for this, and invariably fall behind.
  • Keep in mind that providing the team with the necessary information in a timely manner will keep your project on track.
  • Talk with your custom dev firm about what items are absolutely necessary versus wish list items for down the road. Those insights will help them plan effectively.

3. Price Breakdown

Most people simplify the contract down to how money exchanges hands, but it’s so much more than that. In reality, the contract drives behavior before, during, and after the project on both sides of the table.

There are different types of contracts to choose from when contracting custom web application development. A flexible developer will attempt to match the nature of the project with the contract, but a responsible developer will also advise you that the contract should share the burden fairly between both parties.

#1 Time and Materials

The classic setup: In this scenario, the software developer trades hours for dollars. It’s a simple arrangement that allows for payment to the developer even if the project takes longer than anticipated.


  • The developer doesn’t rush or cut corners to get the project done as quickly as possible.
  • It’s less complicated, and therefore the fastest way to get a project started.
  • You know exactly what you’re paying for.
  • It forces increased trust and communication.


  • You have less control of the budget. As the buyer, you assume most, if not all of the risk.

#2 Fixed Bid/Fee

The second most common structure: You and the software developer agree on what should be built, the developer puts a firm price on it and, in a perfect world, that’s that.


  • The developer assumes all risk, while the client can rest easy knowing the project will remain on budget.
  • It forces increased communication on the front end of the project. Everyone has to know exactly what is being built.


  • Any miscommunication upfront can present huge risks to the project. With the developer assuming all the risk, they can change their behavior when faced with a perceived threat and act with self-interest in mind.
  • In a worst-case scenario, the developer may take shortcuts and sacrifice quality to stay within budget.
  • This model is the most complicated way to get a project started, requiring considerable work upfront, which leads to increased design costs and a longer time to launch.
  • Even with the best design process, change requests will still happen. As you learn more about what you want/need from your software and developer, you’ll incur costs to have changes implemented.

#3 Fixed Budget

A less common yet more creative approach: In a Fixed Budget model, both client and developer agree that neither of them know enough to perform a fixed bid safely.

Rather, both you and your software development firm agree on a targeted budget for your project, with penalties if that budget is exceeded. You’ll work together to assemble a plan that allows the developer to build as much as it can under that budget, with frequent progress checks and forecasting to ensure core obligations are met.

The secret strength to this contract is that the developer acknowledges a couple of industry truths: The last few frills of a project are generally the most expensive, and often not needed.

Because a Fixed Budget structure focuses heavily on core functions and key deliverables, it tends to expose whatever isn’t a priority so you don’t sink time and money into those things.


  • Collaboration is a must: Success with a Fixed Budget setup requires everyone to be on the same page throughout the project.
  • Communication is tight and consistent.
  • Risk is shared, so no single party gets burned. Behavior and expectations are modified to make the project a win for everyone.
  • Client and developer are focused on business objectives and implementation. The developer isn’t focused on profit margin and the client isn’t worried about the budget.


  • Requires a lot of trust and hard work with a new client/developer relationship.
  • There is a risk that the client won’t get everything they imagined at the start. Even with good communication, the client may experience some level of disappointment.

#4 Capped Budget with Accelerated Bonus

Functioning the same as a Fixed Budget, this contract includes a financial reward if the developer finishes ahead of schedule and on budget: an added incentive for the developer to work as efficiently as possible.


  • Same as Fixed Budget, with added emphasis and reward for efficiency.


  • Same as Fixed Budget. However, the efficiency incentive may result in an over-emphasis on speed over quality.

Final Thoughts

Understand that contract terms impact not only payment, but also behavioral motivation. For that reason, any contract that forces collaboration is the way to go.

We often warn clients about contracts that shift all burden to either party. Working as a team is the only way to truly accomplish a win-win project. 

Still have questions? You should. We invite you to request a consultation—we’ll steer you right and help ensure your investment is profitable one.